Researchers detect fraud with highest accuracy to date

September 18, 2012

This graphic visualizes how MetaFraud is able to increasingly distinguish between fraudulent (red) and legitimate (blue) firms from one stage of the framework to the next.

(Phys.org)—Researchers from Brigham Young University have helped create the most robust and accurate fraud detection system to date using information from publicly available financial statements.

Using business intelligence software that learns and adapts as it processes data, a team of professors from the Marriott School of Management developed a model that correctly detects fraud with 90 percent accuracy.

"We've improved on 30 years of research in terms of accuracy in capturing fraud patterns," said Jim Hansen, information systems professor and study co-author. "This improved detection is crucial given the broad societal costs of management fraud."

Major fraud scandals at Enron, WorldCom and several other firms around the turn of the century were the catalyst for a 78 percent drop in the NASDAQ between 2000 and 2002.

Despite changes to internal control procedures following those scandals, fraud continues to plague economies throughout the world. In 2008, fraud was discovered when Lehman Brothers filed for the largest bankruptcy in U.S. history, which dropped the stock market 22 percent and contributed to the most recent recession.

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Fraud test finds red flags in company data.

Lead author Ahmed Abassi of the University of Virginia, along with Hansen and BYU information systems colleagues Conan Albrecht and Anthony Vance have spent several years developing their fraud detection tool, "MetaFraud."

The MetaFraud framework is comprised of several base-level artificial intelligence "learners" that feed their results into a "meta" or overarching business intelligence algorithm that learns and adapts over time.

Vance likens it to an army general who dispatches spies and informants to carry out reconnaissance and then report their findings back to him. These digital spies report back on patterns observed in annual data, quarterly data, organizational context and industry context so the "general" can generate an assessment of whether or not a firm is fraudulent.

The researchers funneled 9,000 instances (instance = financial information for one firm for one year) from more than 15 years through MetaFraud, and compared its predictions of fraud with known fraudulent firms identified by the SEC. MetaFraud correctly predicts fraud with 80 percent accuracy, and over 90 percent accuracy when MetaFraud reports a high level of confidence, which it was able to do 70 percent of the time.

"This is a very low-cost method of taking data that's already out there, already public, and then in a few minutes calculating, with a fairly high degree of certainty, if fraud is happening in that company," Vance said.

The details of the algorithm and computer models appear in an article published online ahead of print in a special business intelligence research issue of MIS Quarterly, the premier information systems journal.

In making their MetaFraud algorithm available, the BYU researchers hope to equip investors, external auditors and regulators with a tool that accurately assesses a company's risks.

"We've got to be able to stop fraud and corruption – or at least discover it," Albrecht said. "There are people all over the world working on this and there have been a lot of papers published on this. We haven't solved the problem yet, but this is an important breakthrough."

Four Romanians have been charged with hacking into the computer systems of hundreds of US merchants and making millions of dollars in purchases with stolen credit card data, the Justice Department said Thursday.

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The second the algorithm becomes transparent it becomes a tool for cheaters to help confuse people. The reality is that the myrh that fraud is hard to detect is a big lie. We know where the fraud was. We bailed it out. Put no one in jail.

If i had artificial intelligence algorithms to detect fraud id use it to discover which prosecutors and politicians are bought off. The truth is almost all of them are.

Fraud in the markets is not only systemic but it all traces back to the zero interest policies of the tbtf owned federeal reserve. They decide which frauds get zero interest loans to paper over. And which frauds get tucked away like mf global.

Why do I have very little confidence that this tool will be adopted and put into use by, say, the IRS, FBI, SEC, or even the Justice Department?

But you can bet that it will be put to use by insurance companies and investment bankers.So while there may not be legal recriminations the result will be the same: fraudulent companies will go bust (hopefully) sooner than later.

But this is a sad, sad day for any one in an organization that is employed below the VP level...

If you're employed in an organization that has fraudluent VPs/CEOs then you're shafted either way. Not much you can do about it (and precious little chance that the top echolon will get billed for their fraud).

It may not change much in the current state of affairs, but it may prevent future ocurences (or at least detect them earlier so that less damage is caused). If it does that then it's already worthwhile.

If you're employed in an organization that has fraudluent VPs/CEOs then you're shafted either way. Not much you can do about it (and precious little chance that the top echolon will get billed for their fraud).

It may not change much in the current state of affairs....

AA,

This is exactly my point. The fraud that really matters is practised top-down, from the very highest levels of the banking/finance/insurance industries --which has just recently been demonstrated to us, most noticeably beginning in September of 2008.

The occasional fraud in business that occurs below the VP level is so miniscule in extent as to be nonexistent in comparison to the fraud perpetrated at the command-collude-and-control level.

And just for further clarity --fraud practiced on the petty level is of course still fraud, but it is a pervasive evil that the body capital can and does live with, as evidenced by the generally robust global economy over the last 60 or so years.

Thre are a number of points to notice. Among other things, the software claims to be able to spot fraud with at least 80% accuracy. The "proof" is questionable. The way it's phrased, it seems to suggest that 9000 firm years of data were fed through MetaFraud, whether 15 years worth for 600 firms or 1 years worth for 9000 firms is not specified. But it is acknowledged that predictions of fraud for those firms correctly identified known fraudulent firms at least 80% of the time. But, these years that fraud is predicted, are they years that the SEC asserts those firms were acting fraudulently? What about the 20% that weren't recognized as fraudulent? How did they manage to hide it? And what of the 20% of predicted fraudulent firms that, supposedly, haven't been brought up on charges? Are they, perhaps, really fraudulent? Shouldn't people be warned of their identities? Maybe MetaFraud was right in 100% of predictions, some just haven't been charged yet!

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